By G. Holland vanValkenburgh

While Small Business is the ‘Backbone of our Economy,’ Family Business is its DNA. Think of the family farm when the family lived over the livestock, then the butcher lived over the butcher shop, the owner over the restaurant, etc.

Many successful enterprises grew from family ventures: Think of Ford Motor Company and Tyson Foods. Yet, why do less than 15 percent make it to the third generation and why are less than 10 percent of owners prepared financially to retire from their business at retirement age?

Family-run businesses have their own unique advantages and challenges.

A family business has the benefit of an already established stable leadership. The Head of the household heads the Company. A common division of labor is that the husband does the heavy lifting and his wife, the bookkeeping at home and at work. The children start early and maintain lesser responsibilities. As a negative, the roles may not change until the dominant family member dies or retires.

Growing up in a family business, members are uniquely committed, owing loyalty and energy to both. Children learn by working and seeing the business function. Dinner discussions invariably include the business. Young Henry and Edsel Ford were known for quizzing their father as well as Plant workers about the work being done. Their father quizzed them back at the dinner table. Such intense interest is unlikely in a normal employment relationship.

Most families plan and strategize in terms of seasonal or longer benchmark timing. They do not do quarterly reports like public companies to mollify shareholders. For most, long-term planning is more beneficial and meaningful. That is, in part, why many successful businesses elect not to go public, despite the allure of easy capital.

Family members in most businesses are familiar with most if not all the roles required. They are protective and proud of their enterprise. When needed, they pitch in. Long after it was public, Mr. J. C. Penny was seen pushing a broom in one of his stores to clean up a bottle of spilled salts. Estee Lauder, who created many of her products in her kitchen, was not above helping sell at a Department Store counter. Family have a stake in company success. “Not my job” is not uttered by family. “Let’s get it done” or “I’ll do it” is.

Similarly, family members are often willing to do what they can to keep the business afloat or to help it expand. That may be putting in money, a pay cut, or simply hours and hours of unpaid grunt work. Families ‘close ranks’ to assure long-term success. Often wives and children take outside employment to secure benefits (health insurance) and to limit reliance or stress on the family enterprise.

A family business is sensitive to the personal needs of members. As an employer, there are few bosses as sympathetic when a member needs time off for family or needs medical attention or financial aid. Family looks after family.

While you expect owners to naturally favor family, it can lead to a major, costly trap: Nepotism. Any clear (or perceived) bias over qualified employees is sure to cause trouble. Growth and long-term success require workers feel they are being treated fairly. More and more companies are recognizing this and many now hold family to a higher standard.

We have worked with many entrepreneurs who learned and honed their skills at a family firm but left because their contributions were not recognized while less competent relatives were advanced over them.

Not all family members want to join the business despite expectations.  Sometimes the option isn’t even discussed. Those who stay against their will are often disgruntled and may become apathetic or disruptive. If employees, they would have been fired; as family, they may be tolerated. The best course may be to release them from the business or isolate him or her in an area of no harm to the business. It is rumored some very successful oil prospectors got started with such stakes from their families.

The close relationship of family also engaged in commerce assures equally strong bonds of trust and loyalty. However, such trust and acceptance affords ample opportunity for fraud or corruption. Many a family has suffered the scandal of an errant scion who helped himself at the till. The only answer is to set standards and rules applicable to all – family and employee alike – with periodic surprise audits.

Most family businesses today, whether in their first generation or their tenth, expect incoming members to be better educated than their elders. The heirs go into the world of business to acquire familiarity with not only the way business is conducted now, but will be in the future. They value experience over an MBA and hope to welcome them back into the business as seasoned employee-owners.

Close family can lead to certain assumptions. Those members who ‘left’ the business did not leave the family. Thus, having grown up in the business, they expect to inherit a share of it.

Therein lies a problem too often ignored or postponed: proper creation of an exit plan designed to treat heirs fairly and preserve the family business.

H & M bought the business from H’s father in 1993. The final share was transferred at H Senior’s death in 2005. Of their three children, only Valorie wants to run the business. H & M want them to inherit equally. Like too many of their peers, H & M, now in their 60s, have yet to adopt a succession plan even though Val is now President and her sons are employees.

True to type, H & M still have final say on company policy and expenses. They have wills from 2005 leaving everything to be divided equally, condemning Val to work for her siblings.

Lack of a Plan transferring the business to those (Val) capable of operating it may doom it to failure and the family to bitter strife.

Lack of preparation for that ownership transition is why less than 15% of family enterprises survive to the third generation. Acknowledging death and retirement do NOT bring them on prematurely.

Family is where the local and the great began, from duPont, Perdue, and Mervine to Walton and Porsche. Living and working together fosters a strength of purpose, a shared vision, teamwork and dedication not found in other enterprises.  When successful, they are resilient, involved responsible members of the community in which they live.

Our experience is that family businesses today are optimistic and eager to grow and contribute to society. They support our communities, and are responsible citizens who reflect our values.  We wish them well and offer our support for their success.

About the author

G. Holland vanValkenburgh, principal at VANCO Financial Group has over 40 years of experience finding answers to tough questions.